The Truth about Fannie Mae and Freddie Mac

Post navigation

Fanniegate for Dummies

Today, September 7, 2015 is Labor Day, a national holiday recognizing ordinary working Americans. Today is also the 7th anniversary of the announcement that the Government took control of Fannie Mae and Freddie Mac. Lastly, today also marks 500 days remaining in the Obama Administration.

Some view the takeover of Fannie Mae and Freddie Mac as a struggle between ordinary working Americans (who had their retirement funds wiped out through the Government’s seizure) versus paid-for politicians (working with big banks fighting for the profitable mortgage lending industry). Seven years for these companies to be “temporarily” controlled by the Government is unprecedented and President Obama’s time remaining to resolve this issue continues to run out.

The situation around this seven-year struggle has been dubbed Fanniegate, with the suffix “gate” applied to any scandalous issue. One of the most curious aspects of this scandal is the lack of attention it receives. A majority of journalists seem to only cover certain parts of the story or tend to ignore it altogether. Many of these reporters are known as advocacy journalists, meaning they can only report the version of a story that supports the views or political agenda of their employer. So, you add Big Media in the mix with Big Government and Big Banks and the story becomes all the more interesting.

The media and politicians who are on the side of the banks intentionally capitalize on ordinary Americans’ ignorance of the facts involved with Fanniegate. If we’re being honest here, it is clear that many journalists and politicians are also ignorant of the facts. Actually, only a very few people know all of the facts pertaining to this scandal predominately because the Government has lied from the beginning and continues to this day to withhold the facts from ordinary Americans.

Numerous lawsuits – initiated by a variety of people against the Government – claim that the illegal takeover and the way it is being handled has resulted in stonewalling and secrecy. Our Government is supposed to be “for the people, by the people” but these lawsuits unveil a current Government that is clearly entrenched in their position to battle ordinary Americans. In order to understand all of the facts related to the Fanniegate scandal, the lawsuits have asked to review all relevant official public records. Our Government has fought this effort with every legal maneuver possible resulting in over 10,000 documents being withheld from public scrutiny.

The People’s fight against the Government in many of these lawsuits has added to the frustration in the search for truth and justice. The People’s day in court has been met with: “sorry, you’re in the wrong court” and “sorry, your claim is not ripe (not ready to be heard)” and “sorry, Congress passed a law that says illegal actions by the Government cannot be taken to court.”

Many of you who are reading this editorial are likely thinking by now, ‘everybody know all of this…why did you waste your time writing it and more importantly why am I wasting my time reading it?’

Well to many of us – having devoted more time to Fanniegate than most ordinary Americans – it is clear that the events and facts of the scandal are not common knowledge. Many of us believe that more people should know the facts about Fanniegate. I refer to “the facts,” but do point out that this is an editorial piece which means “the facts as I believe them.”

So, with the presumption that most ordinary Americans are uniformed on even the most basic elements of Fanniegate, I put together the following information in a question and answer format: Fanniegate for Dummies.

Perhaps you could send this paper to a friend you’ve tried to talk to about Fanniegate, but they just don’t get it. Or as you head to the beach or barbeque today, have several copies of this paper to hand out to family, friends…and strangers. Actually, I jest (maybe…). I hope everyone enjoys the holiday!

If you do believe folks you know might benefit from reviewing this information, I encourage you to share it with them. The following information is not meant to challenge anyone’s intelligence as I attempted to keep the ideas elementary and the language very simple, intentionally “dumbed it down.” I wrote it thinking ‘would my kids understand this point…?” If the piece educates or inspires one person I have accomplished my goal. Thanks for reading…

What is Fannie Mae and Freddie Mac?

Fannie Mae is a nickname for a company called Federal National Mortgage Association or FNMA. FNMA was established in 1938 as a part of the US Government. Simply, its mission is to help promote homeownership or the American Dream.

Fannie Mae was separated from the Government in 1968. This action meant that FNMA was now a publically traded company where anyone from ordinary, individual Americans to retirement funds shared ownership in the company. Fannie Mae continues to this day as a publically traded company, meaning not government-owned.

Freddie Mac stands for Federal Home Loan Mortgage Corporation and was established in 1970 in order to provide additional resources to expand homeownership. Freddie Mac was never part of the US government and started its life as publically traded company and remains the same to this day.

How do the two companies work?

When someone buys a home, they typically borrow money from a bank in order to do so. The home purchaser will provide some of the money, or down payment. The bank will loan the rest of the purchase amount, typically 10-20%…sometimes more, sometimes less.

The bank will then “sell” that loan, otherwise known as a mortgage, to Fannie Mae or Freddie Mac. The bank receives income in the form of fees generated from this service. Banks “sell” the loan to Fannie or Freddie in order to get money to generate new loans to new customers. It’s this cycle of creating and selling loans that makes money for the banks.

Fannie and Freddie then bundle a number of these loans or mortgages together and they resell that package, known as a Mortgage Backed Security (MBS) to institutional investors. Fannie and Freddie generate their income from processing fees, as well as insurance fees (insurance serves as a guarantee to the investors in the event of non-payment by the original borrowers of the loans).

This entire process from homebuyer to bank to Fannie/Freddie to institutional investor is referred to as ‘creating liquidity (cash) in the housing market.’

What is an FHA loan and what is Ginnie Mae?

The Government also participates in providing liquidity to the housing market, allowing even more people to buy homes. Under the Housing and Urban Development (HUD) Department, the Government National Mortgage Association – also known as Ginnie Mae – also operates the same type of business as Fannie Mae and Freddie Mac. For instance, the Federal Housing Administration (FHA) and the Veterans Administration (VA) offer governmental assistance programs designed to promote homeownership to certain individuals. Simply put, FHA and VA provide insurance guarantees for the loans they endorse and banks offer these types of loans to qualified homebuyers. Ginnie Mae then purchases these government-backed mortgage loans from the originating banks, in a similar way that Fannie and Freddie operate.

What happened to Fannie Mae and Freddie Mac in 2008?

The world experienced a recession, often referred to as a financial crisis that actually started before 2008. However, confidence fell and panic took over in the summer of 2008. Many banks and other financial institutions experienced severe problems, with several banks on the verge of going out of business.

The Government realized that a domino effect might occur with one bank failure leading to another bank failure and that the banking industry failure could lead to other industry failures. Ghosts of the Great Depression that started in 1929 that lasted a decade started to haunt Government officials’ minds. In an effort to thwart another depression, the US Department of Treasury and the Federal Reserve Bank worked with the President and Congress on a plan to end or at least lessen the crisis.

One of the actions that the Government took was to take over control of Fannie Mae and Freddie Mac in September 2008.

Why did the US Government “take control” of Fannie and Freddie? Was it legal?

Why the Government took over these two private companies and where these actions legally justified are two incredibly important, yet very different questions.

At the time, recall that banks had difficulty maintaining their businesses. Also, many ordinary Americans were also affected by the recession with many layoffs occurring. The Government forecasted that home loan defaults would increase thus resulting in more homes being foreclosed upon.

Banks merely stopped giving new loans for people to buy homes. If there are no homebuyers that means there are no home sellers. People who needed to sell their homes due to their own financial difficulty just could not sell. Home values plummeted as a result of the increase in foreclosures.

Providing that the housing industry represents nearly 20% of the US economy, Government officials in the summer of 2008 were in a panic state wanting to avoid what they feared to be a total collapse of the US economy.

The US Treasury Department, led by Secretary Henry Paulson, devised a plan that he thought would avert this financial disaster. In hindsight, many experts now believe that Paulson overreacted. Some speculate the overreaction was based on the immediacy of the situation. However, others are more cynical in their assessment viewing Paulson’s actions as deliberate intending to benefit a select number of banking and investment executives. Before joining the Government, Paulson was an executive at a major financial company (Goldman Sachs).

What did happen was Paulson rushed through Congress laws specifically designed to allow him to take the actions he thought necessary at the time. One of these actions was to inject $250 billion into US banks. In October 2008, Paulson summoned the heads of the nine largest banks to Washington, DC. Paulson made the large banks a deal they could not refuse…literally, he would not allow the banks to refuse taking money that many of them said they did not need or want. Paulson viewed the banks as major cogs in the US economic machine and the forced injected cash was the oil he thought necessary to keep the machine running.

But, prior to the forced bank bailouts that started in October 2008, Paulson also forced another part of his plan. In September 2008, Paulson met with James Lockhart to discuss a portion of his plan. Lockhart was the Director of the Office of the Federal Housing Enterprise Oversight (OFHEO, since renamed the Federal Housing Finance Agency or FHFA), the federal agency that regulates Fannie and Freddie’s industry.

Lockhart had recently provided public assurance that Fannie and Freddie were in stable condition and could make it through the current recession. Incidentally, Paulson also provided Congress and the public with the same assurance regarding Fannie and Freddie’s financial health. The two companies, along with most other American companies at the time, were experience a downturn in their businesses but it was officially declared that Fannie and Freddie would make it through the recession.

However, shortly after these public, positive endorsements of Fannie and Freddie, Paulson convinced Lockhart to agree to a plan for the Government to take over control of these two private companies. Lockhart resisted at first, but Paulson was determined to have it his way, as usual. Lockhart reluctantly agreed and the Board of Directors for Fannie Mae and Freddie Mac were called to meetings on September 6, 2008 with Lockhart, Paulson and Ben Bernanke, Federal Reserve Chairman.

Official records of these meetings have not been released, but according to comments and actions after these meetings it is clear that the Government coerced the Board Directors of both companies to agree to a takeover – a deal they could not refuse. Some people familiar with the meetings state that the Government threatened to do everything in its power to put the companies out of business if they did not agree. Others have speculated that the company executives were threatened with personal criminal charges if they did not agree. However they were offered personal immunity from criminal charges if they did agree to the plan.

Both companies’ Board Directors needed to provide an immediate decision to the Government’s demand – surrender or be killed… No deliberation…no discussing with other company management…no discussion with company shareholders, whom the Directors represented and worked for. IMMEDIATE! Accept now, or suffer the consequences – both as a business and personally. Both Boards agreed to Paulson’s plan. Records show that both meetings lasted only one hour.

Does one hour seem like enough time to deliberate handing control of a private company to the federal regulator who had just recently declared the company to be in stable financial health? Comments from company executives and government officials present at the meetings stated there was no real choice – the Board Directors consent was clearly sought through intimidation and provided under duress.

Congress had just recently passed a law that Paulson requested providing authority for the Government to takeover Fannie and Freddie. In order for the Government to takeover Fannie or Freddie, one of several criteria needed to be met. None of the criteria was met except for one: consent of the board of directors. However, the consent needed to be done in good faith. Receiving consent through means of threats and coercion does not qualify as “good faith.” Therefore, the takeover of Fannie Mae and Freddie Mac was an illegal action by the Government.

The following passage appears on FHFA’s website:

How were the Federal Housing Finance Agency conservatorships established?

Pursuant to authority granted under Housing and Economic Recovery Act and the Safety and Soundness Act, on September 6, 2008, the Boards of Fannie Mae and Freddie Mac both assented to the order of Federal Housing Finance Agency Director Lockhart appointing the Federal Housing Finance Agency as conservator of Fannie Mae and Freddie Mac.

Notice the phrase “assented to the order.” Did the Board Directors approach the Government for help because they needed it? Did the Government convince the Directors their companies would need assistance? No, the Board Directors were intimated into making an immediate decision and ultimately assented to the command of the Government. Paulson wasn’t going to take no for an answer.

How is the takeover being managed and how long is it supposed to last?

Congress provided Fannie and Freddie’s regulator, FHFA, the ability to legally assume control of the companies through a process call conservatorship. Both Fannie and Freddie were placed in conservatorship on September 6, 2008 and have been in that state ever since. FHFA acts as the conservator of Fannie and Freddie, effectively managing both companies. However, both companies are still owned by shareholders and both companies’ stock has continuously traded on the stock market since before and after September 6, 2008.

Despite Lockhart and Paulson assuring Congress that they would not place Fannie and Freddie into conservatorship, they did just that. And immediately after Lockhart and Paulson placed the companies in conservatorship they assured Congress that the action would be temporary. Actually, the law allowing for conservatorship (or Government takeover) states that it can only be temporary. Seven years is not temporary…and there is no end in sight…

Did the taxpayers lose money in “bailing out” Fannie and Freddie?

No. Just the opposite.

The Government, euphemistically calling itself “the taxpayers” when it describes their actions with Fannie and Freddie, has not lost any money. In fact, “the taxpayers” (which more accurately should be called “the tax collectors”) have made billions of dollars on the illegal takeover of Fannie Mae and Freddie Mac.

We know that Paulson and Lockhart stated the Fannie and Freddie were financially stable up until they were illegally seized. We also know that the management of both companies did not want to be taken over by the Government, as they too believe their companies to be financially solvent without need for unwanted Government interference.

Further, the former CFO for Fannie Mae has stated Fannie Mae did not need a cash infusion from the Government. Additionally, independent accounting experts have reviewed the public financial records of Fannie Mae and have concluded that Fannie Mae did not need financial assistance from the Government.

If Fannie and Freddie did not need a bailout, why did the Government invest billions of dollars into those companies?

The terms of the payment state that Fannie and Freddie can never repay this money

Fannie and Freddie have returned $239 billon to the Treasury Department

Again, Treasury injected billions of unneeded funds into Fannie and Freddie. The companies returned $239 billion to the Treasury Department, yet none of that returned money can be used to repay the original debt…sounds unbelievable, but it’s true.

Plus, the $239 billion is the companies’ profits after they paid corporate income taxes. And the companies were even more profitable than this figure indicates because both companies were allowed to retain some profit as working capital. However, the working capital will go to $0 in 2018 due to the “bail-out” deal Treasury devised for Fannie and Freddie.

The Treasury deal states that all of the profits of these two private companies will continue to be paid to the Treasury Department…forever.

While this next point is perhaps a bit too complicated for this editorial, simply put the Government injected money into Fannie and Freddie for two reasons a) to ultimately help the banks that were the real cause of the financial crisis and b) to create unending indebtedness to the Government.

The Government created an enormous phantom debt – one that wasn’t needed and one that has been repaid. And the Government has profited in the billions of dollars. The Government wants this money in part because of their enormous debt (spending more money than they have).

When Fannie and Freddie’s profits increased in 2012, the Government unilaterally changed the terms of their agreement with the companies. This change was the third change or amendment to the agreements and is referred to as the Sweep Agreement. In 2012, the Government made the companies hand over to it nearly all of their quarterly profits (and will be all by 2018) versus what had previously been a fixed rate of return on the injected money. The Treasury Department at the time explained this change was meant to accelerate the wind-down (or put them out of business) of the companies. That was a pretty bold admission considering that the Executive Branch lacks the authority to unilaterally put companies out of business…in other words the action was illegal.

Why did the Government set-up a deal that effectively nationalized (makes them a part of the Government) Fannie and Freddie?

The Treasury has been explicitly clear that their intention was to “wind down” both companies in anticipation that Congress would pass a law to replace the companies. The problems with this plan is a) Treasury lacks the authority to confiscate a private company with the intent of putting it out of business (while reaping huge profits in the process) and b) Congress has not passed a law to replace Fannie and Freddie in the past seven years, nor is it likely that Congress will pass any legislation soon.

Basically, the Government made a mistake. However, the problem is growing because the Government will not admit to making a mistake, fails to correct the mistake and is withholding public records that would clearly identify the mistake.

Why would the Treasury Department and Congress desire to put Fannie Mae and Freddie Mac out of business if they are so successful?

In one word: Politics!

In eight words: To Give the Mortgage Business to Large Banks!

It’s no secret that big banks have a huge influence, if not outright control in some instances, over politicians. Banks contribute to politicians – and give them jobs after they leave Washington – in return for what they want. Banks want to eliminate a large portion of the financial sector that they do not control – Fannie and Freddie’s business.

Having big banks – deemed To Big to Fail – control more of the financial markets is not good for ordinary Americans. The ones who benefit are the bank executives and the politicians they buy.

What about the shareholders of the companies’ stock? Were they compensated when the Government took over the companies?

No, shareholders were not compensated. Many people lost a large sum of money that they were counting on for their retirement. While the shares still exist and continue to be traded on the stock market, their value is nowhere near the pre-takeover worth of the companies. The Fifth Amendment to the US Constitution states that Government cannot take people’s property without fair compensation. However, that’s exactly what the Government did in Fanniegate.

Thanks for reading the simplified version of Fanniegate! I encourage you to spread this information to others…and to dig deeper beyond these superficial highlights.